Deck 12: Reproductive Endocrinology and Fetal Testing

Question 1

Explain why ROI might not be the best measure of firm performance?

Answer 1

The most commonly used measure of corporate performance is ROI. It is simply the result of dividing net income before taxes by the total amount invested in the company. Although using ROI has several advantages, it can be easily manipulated.

Question 2

What are some examples of behavior controls? Output controls? Input controls?

Answer 2

Behavior controls specify how something is to be done through policies, rules, standard operating procedures, and orders from a superior. Output controls specify what is to be accomplished by focusing on the end result of the behaviors through the use of objectives and performance targets or milestones. Input controls focus on resources, such as knowledge, skills, abilities, values, and employee motivation. Some examples of behavior controls are company procedures, quotas of sales calls to potential customers, and rules regarding attendance and tardiness. Some examples of output controls are sales quotas, cost reduction or profit objectives, and surveys of customer satisfaction. Some examples of input controls are years of education and experience. Although output controls, with their emphasis on the "bottom line," are generally considered superior to behavior controls, behavior controls are very appropriate when results are hard to measure and a clear cause-effect relationship exists between activities (behaviors) and results. Input controls are the least useful and are most appropriate when output is difficult to measure and there is no clear cause-effect relationship between behavior and performance (such as in college teaching).

Question 3

Why bother with shareholder value or a stakeholder scorecard? Isn't it simpler to evaluate a corporation and its SBUs just by using standard measures such as ROI or earnings per share?

Answer 3

The answer to the second question is a simple yes. The standard measures, such as sales, profits, earnings per share, return on investment, and so on, are certainly easier to grasp and more commonly used than any of the proposed "improved" models. Then why bother with these interesting measures such as ROVA or shareholder value as measured by economic value added (EVA)? The answer to the question hinges on one's willingness to overlook the limitations of commonly accepted measures as listed in detail in the text. Nevertheless, the proposed measures have problems of their own.
The stakeholder scorecard, as proposed by Freeman, seems to violate guidelines one and two from the text. Although the scorecard provides much more information on a corporation's task environment than does any set of traditional measures, it runs the risk of overwhelming management with too many controls. Are all of them meaningful and useful? Unless the scorecard includes some priorities indicating which measures are most important (and least important) to the corporation, it may just create confusion. The other danger is that if priorities are placed on the measures, the emphasis may very well end up being on the standard measures of sales, EPS, and ROI! Nevertheless, Freeman's set of measures does at least point out that management needs to consider more than just the standard measures of performance.
Economic value added (EVA), a measure of shareholder value, is being increasingly touted as an improvement over traditional measures. Based on the assumption that the stock market is the ultimate decider of corporate performance, an emphasis on this measure forces management to especially monitor all forces that can affect stock price and dividend rate. In the long run, this may be an excellent measure, but it is hard to see how it is an improvement over ROI (if ROI is used in a long-term manner) other than its relationship to stock price. Like the traditional measures, shareholder value can be manipulated in the short run by following a profit strategy or by manipulating the buying and selling of stock. Another limitation is this measure's concern with only one aspect of the task environment-the shareholder. The conclusion seems clear: there is no one best measure or group of measures. The key is to use those measures that have the most value to those most affected by corporate performance and to keep them in perspective by understanding their advantages and limitations.
In contrast, the balanced scorecard combines financial measures that tell the results of actions already taken with operational measures on customer satisfaction, internal processes, and the corporation's innovation and improvement activities-the drivers of future financial performance. This may be the best way to measure overall corporate performance.

Question 4

Is the balanced scorecard a useful tool for developing, controlling and enhancing the strategy implementation process of an organization? Why or why not?

Question 5

Is benchmarking just another fad or is it really useful for all firms? Why?

Question 6

Why is strategic control important in monitoring the process of strategy implementation?

Question 7

Is the evaluation and control process appropriate for a corporation that emphasizes creativity? Are control and creativity compatible? Explain. (This is an open question.)

Question 8

Why are goal displacement and short-run orientation likely side effects of the monitoring of performance? What can a corporation do to avoid them?

Question 9

Why is EVA an important component of the strategic management process?

Question 10

What are the best methods for evaluating the top management team?